Inheritance Tax Question - Post 2027

cfw1994

Fermion said:

Thanks for the various responses.
I'm afraid that in our case we will be well into IHT. 
For the final survivor, current situation is (a) property circa £900K now, (b)Savings/Investments/ISAs circa £750K, (c) Combined DC income Drawdown pensions currently £1.2M.
What I don't still quite understand still is how IHT fits in with charitable gifts. We have written in our Wills that 10% of our net estate goes to charity, thus reducing our IHT to 36%. However the question is (given the pension pot is part of the estate but also in Trust) how will the IHT component of the pension pot (paid by the PSA) also be charged at the reduced 36% rate? How will that work? Also for the pension pot, how can monies from that be paid to charities when it up to the pension trustees to pass to the  designated beneficiaries? Very confusing.

We both had planned to continue taking less than the natural DC pension yield, but if the draft consultation arrangements go ahead it would seem to make sense now to drawdown more from our pensions and maybe invest more(ie the surplus) in our stocks and share ISAs. (we currently draw the full dividend yield from our ISAs). We are both still basic rate tax payers so we have  leeway. The rationale being that although our ISAs will incur the full 40% IHT rate, at least our Children won't have to pay any further tax on that element of our estate.

I'm going to have to chat  again at some point with the Wealth Manager who helped us plan our Wills.

I would agree that the proposed plans mean it will be more sensible to draw more out of the DC pot.

If your goal was to pass more onto your children, I feel the sensible thing to do is gift more to them during your lifetime, ideally when you still have a decent runway of years ahead.   

They get the money sooner, perhaps when they will be more able to make good use of it.  You get to see how they use it whilst you are both still alive & hopefully well 💪

In many ways that sounds more like a win-win scenario, no?

We fully intend sharing more with them over the next few years (& we have hopefully 20-30+ years ahead!).  Indeed, we started last weekend with a fancy meal in London with them and their partners to celebrate our 30th wedding anniversary (& a fancy hotel for us 😎) - a fantastic time - I recommend heading up Horizon 22 on a nice day for amazing views across the City!

Having the DC pot outside of IHT never really made sense: it always felt like a Government-created loophole to me, despite us planning to take advantage of it.
The proposals will change behaviours that might get more money into the economy sooner 🤷‍♂️

Do let us know what your Wealth Manager suggests 👍

Linton

Fermion said:

Thanks for the various responses.
I'm afraid that in our case we will be well into IHT. 
For the final survivor, current situation is (a) property circa £900K now, (b)Savings/Investments/ISAs circa £750K, (c) Combined DC income Drawdown pensions currently £1.2M.
1) What I don't still quite understand still is how IHT fits in with charitable gifts. We have written in our Wills that 10% of our net estate goes to charity, thus reducing our IHT to 36%. However the question is (given the pension pot is part of the estate but also in Trust) how will the IHT component of the pension pot (paid by the PSA) also be charged at the reduced 36% rate? How will that work? Also for the pension pot, how can monies from that be paid to charities when it up to the pension trustees to pass to the  designated beneficiaries? Very confusing.

2) We both had planned to continue taking less than the natural DC pension yield, but if the draft consultation arrangements go ahead it would seem to make sense now to drawdown more from our pensions and maybe invest more(ie the surplus) in our stocks and share ISAs. (we currently draw the full dividend yield from our ISAs). We are both still basic rate tax payers so we have  leeway. The rationale being that although our ISAs will incur the full 40% IHT rate, at least our Children won't have to pay any further tax on that element of our estate.

I'm going to have to chat  again at some point with the Wealth Manager who helped us plan our Wills.

1) Inherited pensions being liable to tax doesnt require that they come under normal estate inheritance rules.  The two could be completely separate. Exactly how it will all work will presumably be clearer in due course.

2)I dont see why would it make sense to withdraw some iof the pension now.  If you keep it in your pension your estate pays IHT and your beneficiaries pay income tax.  If you withdraw the money now and put it in an ISA you pay income tax and your estate pays IHT.

Barring differences in tax bands the results as far your children are concencerned would be much the same.

Grumpy_chap

ader42 said:

Having said that, I would not describe it as double taxation at all in almost all scenarios. If you had tax relief on the way in of any level then the income tax on the way out balances it. I suppose you can call it double-taxation plus tax-relief if you want to be a pedant like I often am. 

I agree, it is not double taxation. 

Money in a pension has been accrued with tax relief (at the individual's appropriate marginal rate) on the way in and will then be taxed (at the individual's or beneficiaries' appropriate marginal rates on the way out).

Money in a pension may also have benefitted from avoiding Employee's NI on the way in and then no NI arising on the way out.

Money in a pension may also have gained access to other income while the contributions were made - the most obvious example is reducing ANI by extra pension contributions to avoid HICBIC.

Overall, the money in a pension, whether drawn before or after death still seems to be an overall tax saving versus the money being received and contributed to an ISA or similar.

squirrelpie

Linton said:

2)I dont see why would it make sense to withdraw some iof the pension now.  If you keep it in your pension your estate pays IHT and your beneficiaries pay income tax.  If you withdraw the money now and put it in an ISA you pay income tax and your estate pays IHT.

Isn't the point to withdraw the tax free part of the pension, otherwise its tax-free nature is lost? Plus if you already know of differences in the applicable tax rate between you and the beneficiary as discussed.